Zimmer Holdings (ZMH)

Q4 2010 Earnings Call

January 27, 2011 8:00 am ET

Executives

James Crines - Chief Financial Officer and Executive Vice President of Finance

Paul Blair - Vice President of Investor Relations

David Dvorak - Chief Executive Officer, President and Director

Analysts

Charles Chon - Stifel, Nicolaus & Co., Inc.

Richard Newitter

Steve Beuchaw - Wachovia

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Raj Denhoy - Jefferies & Company, Inc.

Derrick Sung - Bernstein Research

Rob Wisniewski

Adam Feinstein - Barclays Capital

Bruce Nudell - UBS Investment Bank

Joanne Wuensch - BMO Capital Markets U.S.

Presentation

Operator

Mr. Blair, you may begin your call.

Paul Blair

Good morning. I'm Paul Blair, Vice President of Investor Relations for Zimmer. I'd like to welcome you to the Zimmer Fourth Quarter 2010 Earnings Conference Call. Joining me today to host this call are David Dvorak, President and Chief Executive Officer; and Jim Crines, Executive Vice President, Finance and Chief Financial Officer.

This morning, we'll review our performance for the fourth quarter, provide you with an update on certain key matters, present an update on our outlook for 2011 and conclude our discussion with a question-and-answer session. We understand that this is a very busy reporting day, and we'll do our best to keep today's call close to an hour in length. Therefore, we ask the participants pose one question with one follow up to allow as many callers as possible the opportunity to take part in today's call.

Before we get started, I'd like to point out that this presentation contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, based on current expectations, estimates, forecasts and projections about the orthopedics industry, management's beliefs and assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from those in the forward-looking statements. For a list and description of the risks and uncertainties, see the disclosure materials filed by Zimmer with the Securities and Exchange Commission. Zimmer disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This presentation also contains certain non-GAAP financial measures. A reconciliation of such information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the periods to be presented on this conference call was included in the press release announcing our earnings, which may be accessed from the Zimmer website at www.zimmer.com under the section entitled Investor Relations.

In addition, we routinely post important information for investors on our website in the Investor Relations section. We intend to use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investor Relations section of our website in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. A rebroadcast of this call will be available from approximately two hours following the conclusion of today's call through the end of the day on February 10, 2011, and can also be accessed from the Investor Relations section of the Zimmer website.

At this time, I'd like to introduce David Dvorak, President and Chief Executive Officer of Zimmer.

David Dvorak

Thank you, Paul, and good morning, everyone. We're glad you've joined us on the call today. This morning, I'll review our fourth quarter financial results and provide comments on several highlights from the quarter and the full year 2010. Jim will then provide additional financial detail, as well as our 2011 guidance. Except as otherwise noted, I'll state all sales in constant currency terms and I'll discuss all earnings results on an adjusted basis.

In the fourth quarter, we improved top line sales and delivered a strong bottom line performance with solid earnings and cash flow. Successful execution of product launches throughout the year helped us finish out 2010 with sequential improvement in nearly all of our businesses. In fact, the only business that did not produce sequential sales growth improvement was Zimmer Surgical, which generated solid growth of 8%. Our results in the quarter and full year reflect continued progress in the execution of our strategic agenda as we drive growth in revenues, earnings and cash flow through performance improvement initiatives.

Moving into 2011, we're well positioned to further advance this agenda, strengthen our leadership position in joint reconstruction and increase share in our emerging businesses and geographic markets. Net sales for the quarter were $1.13 billion, an increase of 3.0% and our earnings per share were $1.27, an increase of 13.4% over the prior-year period. Full year 2010 sales were $4.2 billion, an increase of 2.3% and our full year 2010 earnings per share were $4.33, an increase of 9.9% over the prior year. For the fourth quarter, we experienced balanced year-over-year sales growth in all of our geographic segments. Americas grew 3.1%, Europe, Middle East and Africa grew 2.7% and Asia Pacific, again, led our segments with sales growth of 3.2%.

We delivered improved sequential performance in our Knee business, with Knee sales for the fourth quarter increasing year-over-year 0.3%, reflecting positive volume and mix of 2.3% and negative price of 2.0%. Recognizing that we have more work to do, we believe that our Knee business is positioned for further improvement based on ongoing instrumentation launches and future product development. Patient specific instruments and posterior referencing instruments for our Legacy systems, which remain the most widely utilized and clinically successful Knees in the world, should enhance our ability to win in the marketplace.

Hip sales increased 3.6% in the fourth quarter, reflecting positive volume and mix of 5.6% and negative price of 2.0%. The encouraging performance of our Hip business was supported by strong sales in the Americas, which delivered 6.3% growth. A particular note was the performance of our Continuum Acetabular Cup System, which enjoyed substantial sales growth in the quarter. This innovative system enables surgeons to choose between bearing surfaces to match patient's lifestyle demands. The positive impact of product launches in many of our businesses in 2010 demonstrates how strategic innovation, combined with solid sales execution, leads to enhanced growth as evidenced by the performance of our Hip business.

Read the rest of this transcript for free on seekingalpha.com